B&G Foods, Inc.
Q3 2014 Earnings Call Transcript

Published: 21 Oct 2014

[Operator:]

Good day and welcome to the B&G Foods Incorporated Third Quarter 2014 Financial Results Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to David Wenner, Chief Executive Officer. Please go ahead sir.

[David Wenner:]

Thank you. Good afternoon everyone and welcome to the B&G Foods’ third quarter 2014 conference call. Sorry for the delay, we had some kind of technical difficulty. You can access detailed financial information on our quarter in our earnings release issued today, which is available on our website at bgfoods.com. Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our most recent annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. The company undertakes no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise. We also will be making reference on today’s call to the non-GAAP financial measures, adjusted EBITDA, adjusted net income and adjusted diluted earnings per share. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today’s press release. We will start the call with our CFO, Bob Cantwell discussing our financial results for the quarter. After Bob’s remarks, I’ll discuss the various factors that affected our results, selected business highlights and our thoughts concerning the remainder of 2014. Bob?

[Bob Cantwell:]

Thank you Dave. Net sales for the third quarter of 2014 increased $27.6 million or 15.2% to $209 million compared to $181.4 million for the third quarter of 2013. Net sales of Specialty Brands, which we acquired in April 2014 contributed $22.1 million to the overall increase and net sales of Rickland Orchards, acquired in October 2013 contributed $4.5 million to the increase. Net sales for our base business increased $1 million or 0.6% attributable to a unit volume increase of $2.4 million or 1.4%, partially offset by a net price decrease of $1.4 million or 0.8%. Net sales increased by $6.4 million or 38.9% for Pirate’s brands, $1.6 million or 4.8% for Ortega and $1.2 million or 8.7% for Mrs. Dash offset by a net sales decrease of $2.5 million or 29.9% for New York Style, $0.9 million or 5.9% for Cream of Wheat, $0.7 million or 7.8% for Polaner, $0.7 million or 12.2% for Underwood and $0.5 million or 7.7% for B&G Pickles and Peppers. All other brands decreased $2.9 million in the aggregate. Gross profit increased $1.8 million or 2.9% to $63.1 million for the third quarter of 2014 compared to $61.3 million for the third quarter of 2013. Gross profit expressed as a percentage of net sales decreased 360 basis points to 30.2% for the third quarter of 2014 from 33.8% for the third quarter of 2013, largely attributable to a charge cost of goods sold of approximately $3 million relating to a write-off of certain raw material and finished goods inventory used in the production of Rickland Orchards products, which reduced gross profit margin by approximately 140 basis points. The remaining 220 basis-point decrease was attributable to a sales mix shift to lower margin products accounted for 90 basis points of the decrease, and increase in distribution cost accounted for 70 basis points of the decrease and the base business net price decrease previously described as well as the effect of the Canadian exchange rate accounted for 60 basis points of the decrease. Selling, general and administrative expenses decreased $0.1 million, or 0.5% to $21.2 million for the third quarter of 2014 compared to $21.3 million for the third quarter of 2013. This decrease was due to decreases in acquisition-related transaction cost of $1.3 million, consumer marketing of $0.2 million and other expenses of $0.4 million, offset by increases in selling expenses of $1.1 million and warehousing expenses of $0.7 million. Expressed as a percentage of net sales, our selling, general and administrative expenses decreased 160 basis points to 10.1% for the third quarter of 2014 from 11.7% for the third quarter of 2013. Net interest expense for the third quarter of 2014 increased $0.5 million or 4.4% to $11.6 million from $11.1 million for the third quarter of 2013. The increase was primarily attributable to the increase in our average debt outstanding due to the recent acquisitions. During the third quarter of 2014, net sales of Rickland Orchards core products to the club channel continued to deteriorate beyond our projections. As a result, we have lowered our sales projections and recorded an impairment charge to the intangible assets of $34.2 million and in connection with the impairment we recorded charge to cost of goods sold of approximately $3 million relating to a write-off of certain raw material and finished goods inventory used in the production of Rickland Orchards products. Primarily due to the non-cash impairment charge the Rickland Orchards intangible assets, the related write-off of inventory and acquisition related costs, the company reported net loss under U.S. GAAP for the third quarter of 2014 of $4.4 million or $0.08 per share. This compares to net income of $15.4 million or $0.29 per diluted share for the third quarter of 2013. The company’s adjusted net income for the third quarter of 2014, which excludes the after tax impact of non-cash impairment charge to intangible assets, the related loss on disposal of inventory and acquisition-related transaction cost was $20.5 million or $0.38 per adjusted diluted share. Adjusted net income for the third quarter of 2013, which excludes the after tax impact of refinancing charges and acquisition-related transaction costs was $18.7 million or $0.35 per adjusted diluted share. Our adjusted EBITDA, which excludes the impact of acquisition-related transaction costs, the non-cash impairment charge to intangible assets and the related loss on disposal of inventory increased 7.5% to $49.5 million for the third quarter of 2014 compared to $46 million for the third quarter of 2013. Adjusted EBITDA as a percentage of net sales decreased to 23.7% for the third quarter of 2014 from 25.4% for the third quarter of 2013. Moving on to the balance sheet; we finished the third quarter of 2014 with a little more than $1 billion in long-term debt. Our net leverage was approximately 5 times pro forma adjusted EBITDA. Our current dividend rate is $1.36 per share per annum or approximately $73 million in the aggregate based on our current share count. We are reaffirming our adjusted diluted EPS guidance at a range of $1.54 to $1.60. The reasons Dave will discuss shortly, we are decreasing our guidance for fiscal 2014 adjusted EBITDA approximately 1% to a range of $202 million to $206 million. I will now turn the call back to Dave for his remarks.

[David Wenner:]

Thanks Bob. Good afternoon again everyone. This past quarter was encouraging on a number of fronts and makes us optimistic about results from the fourth quarter as we work our way into it. Net sales were up a sizeable 15.2% for the quarter, and while most of that growth came from acquisitions, volume in the base portion of our business was up 1.4% for the quarter. We saw price erosion of only 0.8% bringing the total net sales gain on the base to 0.6%. The price erosion we did see was at the rate of 26% of what we experienced in the first half, validating the expectation that canceling ineffective promotional activity would minimize pricing declines. Of the pricing declines we did see the largest were in the Ortega brand where we continue to see aggressive competitive pricing in certain segments of the category. We did not and do not plan to change our promotional activity here as we have seen meaningful volume gains and share gains in this category. This despite the fact that we are not promoting as deeply or as frequently as competition. We expect a similar outcome on pricing in the fourth quarter and given current circumstances, pricing gains in the first part of 2015 for two reasons. The first of those will be that our price increase that has been announced to be effective January 1st 2015 is being accepted by retailers and will take effect on time. This currently covers approximately half of our product lines and averages 2% with variations on that increase depending on the brand. The second reason is that we will compare to the promotions that we ran in the first half of this year and at this point will not repeat. Between those two we should have a reasonable pricing scenario as we begin 2015. While we did see an overall volume gain in our base business, many of our brands saw modest declines, with the overall result lifted of course by strong performances by specific brands. As we examine these weak points, an interesting geographical trend is emerging which seems to track the economy’s recovery to at least some degree. The softness in our business was focused on supermarket sales in the Eastern United States and more specifically the Northeast. I have discussed in previous calls, the struggles of various chains in this region and the negative impact that they had on B&G Food sales. Those struggles continue, as did the effect in the third quarter. This was compounded by the prolonged outage at market basket in New England, a significant customer for us and strong supporter of our regional brands in that geography. Beyond that even change that have typically gone well in this region struggled somewhat in the third quarter. All of this is a bit frustrating when you look at the rest of our business where we generally saw very good results. Mass merchant net sales for our base business were up 6.6% in the third quarter. Our presence with these merchants is growing rapidly via both organic growth and acquisition growth. Our business at Wal-Mart for instance now consist of over 340,000 distinct points of distribution with 9% growth in points of distribution on our base business in the past year and 14% growth via the Specialty Brands acquisition. Food service net sales were up 2.5% for the quarter and that channel show signs affirming as the economy recover. Our export business, now approximately $30 million in annual net sales grew by 6%. Our Mrs. Dash line has entered Brazil in a meaningful way and appears to be succeeding. The only drawback to having a sizeable export business of course is exposure to currency fluctuations. In our case, we have seen a negative currency effect on earnings of approximately $1 million so far this year. Dollar drug sales were flat for the quarter and military sales up slightly. Warehouse Club sales were up significantly with an increase of over 40% in the quarter. Clubs have grown to approximately 8% of our overall net sales, a benefit of the snack brand acquisitions we have completed. And in contrast for the Northeast, net sales in our Western Supermarket regions were up over 7%. My overall point would be that we are seeing many of our aspects of our business firm in a meaningful way making us helpful for improved volume results in the future. The brand that take grow include, but we would consider our priority brands given margins, size and opportunities. Ortega, our largest brand realized volume growth of over 6%, some of which it gave back in pricing as we’ve noted earlier. Mrs. Dash grew by 8.7% and Crock-Pot, our relatively new seasoning license did over $1 million in sales for the quarter, representing 53% growth on a modest base. Growing brands like these are essential to not only our hopes for organic growth in the base business but also margin improvement. Beyond the base business, we saw a $26.6 million in added net sales in the third quarter from acquisitions. We have lapped virtually all of the snack acquisitions at this point. The only contribution from those in the third quarter was $4.5 million in sales from Rickland Orchards which we acquired last October. The Specialty Brands acquisition contributed the other $22.1 million in acquisition growth. I will speak to that acquisition shortly. Beyond the Rickland acquisition, our snack brands contributed $3.3 million on organic growth for the quarter, an increase of nearly 10% on the overall base sales of those brands. This was driven primarily by a very strong performance by Pirate Brands which grew 39% in the quarter. Most of that increase was the result of exceptional performance at warehouse clubs, a benefit of the relationships we have built through the snack businesses. This benefit will expand in the fourth quarter to two separate events for our Maple Grove Farms brand which will have a pure maple syrup and a salad dressing rotation in clubs, the first in many years. Pirate’s Booty performance in the quarter in the meantime bears out once again the potential we see in the brand in all channels. This brand is underdeveloped in mass merchants and in many supermarket and natural channel outlets. We are addressing these opportunities in various ways. In the case of mass merchants, we have tested direct distribution and planned to convert portions of that business to that format to receive enhanced promotional support. Our efforts in the natural channel have already benefited from our introduction of a non-GMO project verified version of Pirate’s Booty. We are enjoying higher levels of promotional support which we expect to expand to full national support in the first half of 2015. In the case of supermarkets, we have many customers whom we would deem underdeveloped. In many cases, doing only 10% of the sales per store done in our best customers. To address this, we planned to introduce retail activation teams in markets where we see the largest opportunities. These teams are expected to sell in and build promotional displays in conjunction with our distribution partners to grow the Pirate’s brand business to its full potential. We expect that the side benefit will be the use of these teams to rebuild the New York Style business which continues to decline in the face of (inaudible) competition. On the second quarter call, I spoke about the disappointing performance of the Rickland Orchards brand. Given Bob’s remarks about the intangible asset impairment and other charges we’ve taken on the brand, it’s obvious the situation has not improved and in fact sales declined from $7.1 million in the second quarter to $4.5 million in the third quarter. When we bought this brand, its sales were disproportionately in the warehouse club channel with limited distribution in more traditional retail. We were very interested in the strength in clubs and have used that expertise to grow Pirate’s Booty and as I referred to earlier, open opportunities in our other brands as well. Unfortunately, the risk of concentration in clubs that you may lose distribution of key products due to competitive pressure or the ever changing nature of club sales that is exactly what has happened in the case of Rickland Orchards core Greek yogurt-coated bar and bite products which has led to the impairment charge. We estimate that sales for the brand in the foreseeable future will beyond the order of the third quarter. Recent sales for the brand were aided by innovation that led to the introduction of organic trail mix and salad toppers under the Rickland Orchards brand. We believe, we’ve acquired the expertise with this acquisition to continue to innovate under this brand and introduce products that speak to consumer trends and warehouse club interest. In contrast, the Specialty Brands acquisition continued to be a very successful event for B&G Foods. Third quarter net sales for the business were $22.1 million and were accelerating as we entered the traditional season for soup and syrup. The products are largely integrated into our infrastructure, the exception being the incorporation of pancake syrup manufacturing into one of our facilities. This transfer of production from a co-packer required a modest capital investment and packaging changes, both of which are nearly complete, meaning that the transition will be done before year end. Savings from this project combined with SG&A cost reductions position the business at an adjusted EBITDA run rate above our initial projections. Given this new run rate, the purchase multiple for this business would be below seven times pro forma adjusted EBITDA, making this a very accretive acquisition. Given that the business currently does no soup sales in food service, warehouse clubs or other packaging formats, we also believe that there are good opportunities to increase sales in those areas in 2015. As we enter the final three months of 2014, our cost outlook remains the same as before with many of the commodities we do purchase, edging down in price as our positions roll over and continuing the decline in price in 2015 as that year progresses. Those positives however are more than offset by accelerating fruit, nut and packaging costs. Nuts are particularly challenging given the drought in California. While we have purchasing positions expanding into 2015, many growers are waiting for final crop outcomes before quoting future pricing. That has caused speculators to increase prices by as much as 40% on some varieties. We will need to consider formulation changes and pricing as the situation becomes clearer. At this point, the final impact of these variables is not completely certain, but we are reasonably confident that our total net cost increases for commodities, ingredients and packaging will come in at under 1% of sales. Given our commitment to cost reduction under our continues improvement process and already announced price increases, we expect to be able to accommodate this increase in our overall financials. We believe that significant cost issues if any will be limited to very specific product lines. We experienced 70 basis points increase in distribution costs for the quarter approximately 64% of the increase we saw last quarter. We continue to refine our distribution systems that have made progress of becoming more cost effective in shipping snack volume through the system. Additionally, the Specialty Brands acquisition has increased distribution efficiency as we integrate the heavier more expensive products in that portfolio into our warehousing distribution infrastructure. Other operating costs were in line with expectations with the exception of the incremental costs associated with the Specialty Brands acquisition. We have completed the relocation of our Houston warehouse to a larger facility and we’ll begin to relocate our Tennessee warehouse this week completing that move in November. These actions combined with the new warehouse management system that we will introduce in early 2015, are expected to improve costs in this area. As Bob mentioned, our leverage today is approximately five times pro forma adjusted EBITDA. Given the strong positive cash flow we typically experienced in the fourth quarter, we anticipate ending the year in the 4.8 times range. Our Board of Directors recently announced the regular quarterly dividend of $0.34 a share which is an annualized dividend rate of $1.36 a share. This represents a payout of just over 60% of excess cash flow, a level we believe that’s consistent with our philosophy of returning a substantial portion of excess cash to our shareholders. Finally Bob’s remarks and our press release refer to a change in our 2014 adjusted EBITDA to a range of $2,002 million to $2,006 million for the full year approximately a 1% decrease. This is largely due to reduced expectations for the Rickland Orchards business for the second half offset somewhat by positives from the Specialty Brands acquisition. At the midpoint of this guidance, our 2014 adjusted EBITDA would increase by 10.9% from 2013, a positive result but not what we hoped for. We take great pride in the ability of our business to execute on acquisitions and hit projections, so this change is a difficult one. I’d like to end my comments by noting that earlier this year I announced I would be retiring at the end of the year. Upon that announcement, our Board of Directors began a comprehensive internal and external search for a replacement. After much [effort] and deliberation, I’m very pleased to tell you that as you probably read last week, the gentlemen sitting next to me, Bob Cantwell has been appointed to the position of President and CEO of B&G Foods effective January 1, 2015. This appointment is obviously a tremendous vote of confidence in Bob and it’s also a vote of confidence in the value created by our strategy over the past 10 years as a public company and seven years as a private company before that. For all those years and more, 22 years in total, Bob and I have worked as partners to guide B&G Foods as it grew and prospered. With tremendous help from our dedicated employees we made that happen. In early 1997, the equity in B&G Foods was worth $30 million; today, it’s worth approximately $1.5 billion. With Bob at the helm of the company, I know our employees and shareholders can be confident that the company will prosper. He thoroughly understands the company, what works well and what could work better. I certainly have complete faith that Bob will do a tremendous job in his new role. At this point, we’d like to open it up the call for questions. Angela?

[Operator:]

Thank you. (Operator Instructions). And we’ll take our first question from David Palmer with RBC Capital Markets.

[David Palmer:]

Good afternoon and congratulations David and congratulations Bob on your moves.

[David Wenner:]

Thank you.

[Bob Cantwell:]

Thank you.

[David Palmer:]

I was just thinking about the strategic direction you’ve been taking with snacks and the learnings you’ve had there and as also reflecting on Ortega, it feels like many of your core brands and past acquired brands were in categories, where you’re either not interacting with the big food company or at least not overlapping with them in a category where they really wanted to win, a core growth imperative category. In both cases with snacks and also Ortega, you are dealing with companies that desperately want to win in those categories. You’ve gone for growth, but you are in land of giants all of a sudden. Is there a lesson there? Forgive me for the half baked comment here.

[David Wenner:]

Well, you’re right. I mean we love niche products where we don’t have any big competition, those are the ones where you make a lot of money; and if they are truly niche, they may not even be private label there. So those are great pieces of business. But we’ve proved ourselves over the year, we can hold our own against some of these big guys. I mean Cream of Wheat held its own in the hot cereal category against the monster that is Quaker. And in the case of Ortega, we have consistently grown that brand year-after-year. And I’m not saying although pasta didn’t grow at the same time. I mean sometimes you are in categories where everybody is growing and that’s great. And sometimes having a large competitor to explain to people why they come and eat more of this food is great as long as you win the battle on the shelf when they show up at that category. So, we really don’t mind necessarily competing against the general mills of the world. We feel like we’ve done that successfully. We’ve bought Ortega 11 years ago at $80 million in sales; it’s about double that today. So, that’s how we’ve done a good job against the major competitor with that business. And interestingly, the number three guy in the category is another big food company Kraft. And I don’t think Kraft’s doing all that well. So, I think it’s a matter of how well you compete, no matter what your size is.

[David Palmer:]

And when we think back to some of the thing, the charges and the transition costs associated with the snacks business, particularly from earlier this year but as we’re thinking into ‘15, are there any easy comparisons that are coming out of this, anything that you would call out that that will actually make it easier for you to grow year-over-year?

[David Wenner:]

If you mean sales comparisons, Rickland is obviously going to be a drag on our comparisons for a few quarters. But the potential, what we’ve done in the last year that we’ve own Pirate’s is proved to ourselves what the potential in that brand is and it’s not a comparison so much as it is just share opportunity in the brand. I referenced what we see at retail, what we see at mass; it goes beyond that in the vend, it goes beyond that in the sea stores. The last day I was just had a snack sales team meeting and I can’t tell you how pumped up those people are to go out and sell snacks and how optimistic they are about how well they’re going to do. And I think all of that speaks to the fact that we’ve spent the last year plus building a team, building an infrastructure and that that whole team if you will is now ready to really get out there and execute against the business. So, I’m very bullish about the snack business putting Rickland aside of course and extremely bullish about the prospects for Pirate’s.

[David Palmer:]

Thank you very much.

[David Wenner:]

Yes.

[Operator:]

And we’ll now go to Farha Aslam with Stephens.

[Farha Aslam:]

Hi, good evening.

[David Wenner:]

Good evening.

[Bob Cantwell:]

Good evening.

[Farha Aslam:]

Congratulations as well to both of you.

[David Wenner:]

Thank you.

[Farha Aslam:]

Welcome. My question relates to the Pirate’s Booty brand to start with. Dave, you highlighted that you got incremental distribution which is really faster growth in that alternative to club channel. How long do you think that growth rate should continue and when do we lap that new distribution win?

[David Wenner:]

Well, it’s not new distribution as much as it is added event at COSCO. We’re hopeful that the performance of the brand in those events brings it to a point where we have year around distribution of the brand in COSCO that’s obviously for them to decide. But the brand performed with the best of the snack businesses out there in terms of how well it’s sold in those events. So we’re very, very pleased with that. The real new distribution that we see, the opportunities that we see are not so much in club, as I said before, they are in retail where we either have very limited assortment or have very poor performance on the assortments that we have for a variety of reasons. So that’s why we’re adding feet on the street next year to get out there and retailer-by-retailer bring the performance of this brand up to where it needs to be. And the best way I can illustrate that to you is to say that the Stop & Shop chain up in New England does a phenomenal job with Pirates. We sell more products at Pirates products and Stop & Shop than we do in Wal-Mart and something is not right there when that’s the case and we need to bring Wal-Mart for instance up to where it should be in terms of sales of Pirates.

[Farha Aslam:]

Okay. And then when you look at your business overall and think about the promotional cadence in the supermarket, are you seeing overall increase, decrease margin pressures with relations to price?

[David Wenner:]

As I’ve said in past calls that’s very, very category specific. We’re seeing heavy promotional activity in hot cereal, we’re seeing heavy promotional activity in certain aspects of Mexican. Those would be the two I would highlight as places where the large food companies for whatever reason are really pounding promotional pricing and events. And I think in a lot of cases especially in hot cereal part of it is reclaiming sales that from private labels that they lost during the economic downturn.

[Farha Aslam:]

Sure. And so when you look at your gross margin, do you expect it to remain steady from current levels? Do you anticipate margin erosion as you try and match those promotions?

[David Wenner:]

I would say as far as promotional effects go we should see a fairly -- we’ll see a little bit more pricing decline in the fourth quarter, but then you should see margin enhancement in the first half. As I said, we’ve taken a price increase and we rollover against promotional activity we did in the first half of this year that we’re not going to do in the first half of the next year. So, price should be slightly negative in the fourth quarter would be my guess and a positive event in the first half of 2015.

[Farha Aslam:]

Right, thank you. I’ll pass it on.

[Operator:]

We will now go to Andrew Lazar with Barclays.

[Andrew Lazar:]

Good afternoon Dave and Bob.

[David Wenner:]

Good afternoon.

[Bob Cantwell:]

Good afternoon Andrew.

[Andrew Lazar:]

Just a couple of questions, just picking up on some of your fourth quarter comments, Dave, you’ve got a tougher volume comparison with a year ago in the fourth quarter. So, on these sort of -- I think maybe an extra week, if I’m not mistaken, but on the sort of underlying legacy, how would you think volume will fair? Is there anything there other than the tougher comp that we should keep in mind seasonally or anything or would you expect it to hopefully be somewhat positive like this past quarter?

[David Wenner:]

I think it will be somewhat positive like the past quarter. We’re very focused on really that one area where we still continue to see weakness, like I said the base business is doing very well in a lot of other areas. And so, it’s a little discouraging that we have this one area that’s really suffering. And there is no question that that was compounded by the fact that we had, I think about six weeks of outage at a significant retailer with market basket up in New England, who is a huge supporter of brands like B&M and another northeast regional businesses that we have. So, that should be a positive. As you pointed out, we have a 14th week. So, that’s an easy 7% pick-up, obviously artificial. But so, I think from that point of view, we’ll see a decent volume fourth quarter. I wouldn’t be surprised to see the profile look very much like third quarter frankly, putting aside the 14th week obviously.

[Andrew Lazar:]

Right.

[Bob Cantwell:]

And Andrew, the only real issue in the fourth quarter is Rickland. We did about $12 million last year. And as Dave mentioned in his commentary before, Rickland is about a third of the business that we had. So, you’re looking at outside of that decline, we’re very comfortable with volume growth in the fourth quarter. But we’ll see that one-off on Rickland.

[Andrew Lazar:]

Right, okay. And then as you think about gross margins heading into the remainder of the year, I think maybe last quarter, you certainly were hopeful that we would see sequential improvement in the gross margins in the back half. You did see sequential improvement in the third quarter, but perhaps not nearly maybe to the extent that you would have liked. I guess to get to even perhaps -- I haven’t worked it all through yet, but even the low-end of your new full year EBITDA guidance, you really do need that gross margin I think to be again quite a bit sequentially improved by quite a bit. Is that fair and what -- I guess what helps you gross -- would get the gross margin sequentially improved?

[Bob Cantwell:]

Well, I think part of it is, we don’t expect a lot of pricing negative impact in the fourth quarter which -- there wasn’t a huge number in the third quarter, we expect that number to be less in the fourth quarter. And we’re actually mixing out of a lower margin brand in Rickland. So part of this volume growth and the upside in the fourth quarter comes from higher margin brand. Rickland was a very low margin business, less than 10% EBITDA margin, so that helps too. And as Dave mentioned also, we are rolling off against. Our cost profile year-over-year is better in the fourth quarter, some of the commodities have come down for us year-over-year. So we got a little bit of that benefit also.

[Andrew Lazar:]

Great. And last thing you talk a bit more about feet on the street going forward in the snack business activation teams and even some DSD I guess in certain areas. Is the feet on the street your people and the DSD I assume be going through some partner? Can you talk about who that is and what that does or not to the margin profile of the brand, given that doesn’t come for free I assume?

[David Wenner:]

As far as people go, most of them would be our people, there would be some contractor manpower involved as well. I did not say we were going DSD with any of the brand. So that should not be a factor.

[Andrew Lazar:]

Got you. Or you had mentioned, I guess going more direct, so I took that to be DSD. So what’s the difference in the comment around direct, what did that refer to?

[David Wenner:]

Well, as we look at where the Pirate’s brand specifically is underperforming, we think part of the problem is we’re going through a distributor that in some cases also a competitor. And to the extent we think that we can’t fix that that we need to have discussions with the retailer about how we can get the performance side of the brand that they would like to see and we would like to see, then we would have a discussion about maybe their answer is we go direct through their warehouse.

[Andrew Lazar:]

Got it. Excellent. Okay, thanks for the clarification.

[Operator:]

And we will now go to Karru Martinson with Deutsche Bank.

[Karru Martinson:]

Good afternoon. Just wanted to get a better understanding of the environment here. You’re taking price increases January 1st but we’re still seeing declines here in the fourth quarter. I mean how confident are you that these price increases will stick and there won’t be a competitive response?

[David Wenner:]

We’re very confident that the increases will stick there. And in fact some of them are going to go into place before the end of the year, not too early but in some cases, they will be in place before the end of the year. So, we’re very confident. We pick and choose where we’re taking these price increases. We’ve been selective and we’ve done it very modestly. I mean as I said on the average order of 2%, so we’re not going crazy here in terms of the increases. We’re tuning the selection on about half the brands and we really don’t foresee any difficulties with retailers or competitors.

[Karru Martinson:]

Okay. And you guys have certainly done a number of acquisitions but as you have gotten these integrated, it certainly would seem as if the fleet is being cleared here. I mean are there acquisitions on a horizon, have there been changes to your mindset of having the target that $100 million or less of sales and currently what’s your view on multiples out there?

[David Wenner:]

Multiples are very high and that’s part of why you have seen even be more so in terms of acquisitions and when the Specialty Brand comes along where you can do it at a 7 times multiple and it’s the right business for you, you need to jump all over it. Yes, I mean we are part of our story and a very important part of our story is acquisition and doing that in a very accretive way and I don’t think that’s going to change anytime soon, we just look back and look at the value that’s been created over the years and this company is very good at doing it. So it’s a skill set we intend to keep on using. But yes, one of the inhibitors is multiples and that $100 million in sales threshold speaks to that. I mean that’s sort of the arbitrary line in the sand where we see multiples really start cranking up and where you see the Skippy’s and the Ragu’s and all those kind of acquisitions go into the 12, 14 times multiple. We can’t look at an acquisition like that and say that’s going to be accretive. We can look at an acquisition we’re doing it 7 times and say, yes, it’s pretty easy to see, that’s accretive.

[Karru Martinson:]

Thank you very much guys. Appreciate it.

[David Wenner:]

Yes.

[Operator:]

(Operator Instructions). And we will now go to Sean Naughton with Piper Jaffray.

[Sean Naughton:]

Good afternoon. Thanks for taking the questions. Just on the gross margin with the mix component, I think Mrs. Dash was pretty good for you in the quarter and I think your Crock-Pot seasonings were pretty strong. But just wondering what the -- just could you tell a little bit more into what that 90 basis points of mix was really around? Is that just the growth in Pirate’s or was it something in the channel? Just more clarification there would be helpful.

[Bob Cantwell:]

Well, certainly the snack pieces of business and Pirate’s growing almost 40% really affects that. And there is backing out that one-time charge of $3 million, it make the margin look a 140 basis points better. But most of this mix issue is absolutely right. You’re getting a positive for some of the Mrs. Dash and some upside on Ortega growing as well as it did. But with the huge Pirate increase, it is mixing the margin down.

[Sean Naughton:]

Okay. And then you talked about 60 basis points I think on some price declines in FX. Is there any way you could just give us the number on how much FX was an impact for you guys in the quarter. It’s about half of that or was it a little less than that?

[David Wenner:]

FX is not a huge number for the quarter, $40 million for the year. So, it’s around -- it’s between $300,000 and $400,000 for the quarter.

[Sean Naughton:]

Okay. So, pretty nominal. And then just lastly question on the channels out there. It looks like everything seems to be going relatively well outside of the Northeast supermarkets. But just curious on any comments on the Dollar and Drug channel that also appear to be, I think you said it was flat in the quarter and I know that it had been a decently growing business there. But just any comments on that business will be helpful too?

[David Wenner:]

It’s flat. I mean we have a nice steady business there. The problem is it does tend to be a little lumpy and at sometimes there is rotations in the Dollar, especially Dollar stores and to the extent you are going up against the rotation, you may be growing from a base point of view, but you don’t repeat the rotation and you see a relatively flat quarter. But we see that channel as a growth vehicle still somewhat Dollar stores, but really one of the things that’s opening up here as we dig into snacks and look at the opportunities, there is a huge opportunity for us in [sea] stores, which we would tend to lump into that class of trade if you will and very, very large opportunity there and that’s another thing we’re addressing.

[Sean Naughton:]

Okay. That’s helpful. Thank you very much. And congratulations by the way on the new appointment.

[Bob Cantwell:]

Thank you very much.

[Operator:]

And we will take our follow-up question from David Palmer with RBC Capital Markets.

[David Palmer:]

Hi. I wanted just to follow-up a little bit on the snacks business. Can we get a chance to review the first quarter and the second quarter transcript? But I remember there were some distribution issues back then. Can you -- that’s why I was going with the comparison issue. Is there -- where there some paying on the profit line that you’re going to be lapping on that side? And then separately, are you seeing a decrease among the competition like you are in terms of the promotion spending? Thanks.

[David Wenner:]

As far as the distribution goes, yes, I mean if you look back, you’ll see that we had larger inefficiencies in the first half than we had in the third quarter. I think Bob spoke to that to some degree that our distribution variances are decreasing. We’re getting more efficient in terms of shipment snacks. We’re getting some efficacies out of Specialty Brands and we expect that to continue to improve. The only caveat there would be that as you read all the news, there is not good news in the trucking industry or the rail industry in terms of capacity constraints. And those are driving rate increases, I think we’ve seen some substantial rate increases this year that’s part of that equation and we expect that will happen again next year all things being equal. So it doesn’t look like there is a near term solution in terms of trucking capacity and drivers and all the issues that the industry faces. And the only good news is obviously the cost of fuel but for some reason, diesel cost seems to be very sticky on the downside. So, you don’t see a whole lot of relief. For all that move you’ve seen in the gas prices on the pump, I think our fuel surcharge has moved $0.02 a mile which is nothing. So, we continue to see some inefficiencies there. I think there is a point to be made that as we roll over against the inefficiencies we had in the first half, next year’s first half should be favorable versus those inefficiencies.

[David Palmer:]

And also we’ve heard that many companies, not just you were grieving that they took a knee-jerk approach to promotion spending. When they saw the weak volume starting in late ‘13, the promotion spending was on the increase and the efficiency on that promotions went down and there has been perhaps a talk that promotion spending may come back down. Are you alone out there in taking the promotion spending down or are you seeing that behavior elsewhere?

[David Wenner:]

I don’t see any unusual promotion activity in most of our categories. We try to do a few things with brands like Cream of Wheat that just didn’t work. Quaker has been aggressively promoting but it doesn’t -- frankly that doesn’t impact us as much as it does private label. So we decided that we don’t need to chase them on that. Conversely, as I said, our friends at General Mills have been very aggressive with all the El Paso in certain parts of the category and we have been defending ourselves though not to the depth that they do and we’ve been very successful at doing that and that’s why we’re going to continue to do that until we see that landscape change. Other than that I wouldn’t say there is anything significant going on out there, in the categories that we compete in.

[David Palmer:]

Thanks for the color. Thank you.

[Operator:]

And we’ll take a follow-up question from Andrew Lazar with Barclays.

[Andrew Lazar:]

Thanks for the follow-up. Just a quick one, can you just remind us as we go into ‘15, what your sort of incremental productivity or cost saves will look like for ‘15 versus ‘14 just so we kind of add that into the equation of sort of pricing, volume and such when we think about margins?

[David Wenner:]

Well we have an ongoing program here where we’re basically identifying cost reductions at around 3% of sales and working on them. We managed to get probably two thirds of that in a particular year. But frankly, a lot of that goes to defraying cost increases you might otherwise see such as wage increases, benefit increases all those kind of things. And it really lets us when we talk about our total cost increases for the year net of those savings, really identify the increases we spoke to in this call on ingredients, on packaging and things like that and frame that as this is what the total cost increase in the business is probably going to be for the year. So, we fight the good fight against cost, a lot of which allows us to without degrading margins, give our people pay raises and things like that.

[Andrew Lazar:]

Thanks very much.

[Operator:]

And it appears that there are no further questions at this time. I would now like to turn the conference back over to Mr. Wenner for any additional or closing remarks.

[David Wenner:]

Thank you. And thank you all for joining us. We really do appreciate the interest in the company. This is my last conference call and I think my first was in 1997 when we as a private company entered the high yield market. So, after 17 years of conference calls, I bid you adieu. But as I leave and as Bob takes over, I’m very optimistic about 2015 and how this company is going to perform. I think we have our legs under us in the snack business. And as I said, we have a team that’s prime to go out there and really drive growth in that business which was what those acquisitions were intended to do. I think, I see a firming trend in our base business. And I’m very optimistic about how the company will perform next year. Thank you very much.

[Operator:]

Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation.